Whether you’re on the market to buy a new car or are considering refinancing an existing loan, there are many different types of car loans available. The most common options include unsecured car loans, but also include buyback payments, private party car loans, and lease buy out loans.
Do your homework to understand the differences between different types of car loans. This will allow you to choose the one that best suits your needs and financial goals.
Protected vs. safe car loans
Comparing car loan options makes you most likely to come across a safe car loan. These types of loans use the car as collateral. On the other hand, unsecured is a personal loan used to purchase a vehicle.
Protected car loan
Comparing car loan options makes you most likely to come across a safe car loan. These types of loans use the car as collateral. On the other hand, unsecured is a personal loan used to purchase a vehicle.
Unprotected car loans
An unsecured car loan is a personal loan used to purchase a new or used car. Because collateral is not required, they often have stricter eligibility guidelines and higher interest rates. To qualify, you usually need a solid credit score and payment history along with a stable, verifiable income stream.
Car purchase loan
Auto purchase loans cover the cost of purchasing a new or used car.
Automotive purchase loans are available through traditional banks, credit unions, and online lenders. Alternatively, you can use dealer finance to make the process more seamless. While you can usually expect higher funding costs at the dealer, you may be able to negotiate or qualify for a funding agreement.
The amount you qualify will vary depending on the type of loan you are looking for (new or used car loans) and your personal finances details. Each lender will have their own set of guidelines, usually based on their credit history.
Typically, both second-hand car loans have a repayment period of 3 to 5 years, but some lenders offer loan terms up to 84 or 96 months.
Depending on your funding arrangement, you may need to pay a down payment. Financial experts recommend you cut at least 20%, but you do recommend paying comfortably and at a reasonable price.
Private party car loan
Best for: Buy your car from an individual rather than a dealer.
Private party car loans are special loans that are made to purchase cars owned by private parties. Borrowers can secure these loans through banks, credit unions, and online lenders offering this type of loan.
Prices tend to be slightly higher than if you were buying a car from a dealer. However, private purchases may be cheaper than dealer vehicles, potentially offsetting higher rates.
Dealer Finance
Optimal: Car buyers with incomplete credits that are not associated with financial institutions.
Funding your vehicle directly at the dealer is the most seamless of the car loan options, but it is not the perfect financing route for all borrowers. With dealer funding, the dealer matches you with the lender, so the lender has little choice.
If you have a strong credit or established relationship with a financial institution, it usually makes more sense to raise funds there. If you plan to choose dealer funding for convenience, ensure that you have prior approval in advance for use during negotiations.
Lease your acquisition loan
Best for: Lease owners who want to continue driving their leased vehicles rather than starting a new lease or purchasing a new vehicle.
With a lease buy out loan, you can maintain your lease vehicle once the contract is over. You can use it to fund the purchase of the vehicle, as mentioned in the lease agreement.
Lease payments only cover expenses related to depreciation of the vehicle during the lease period, so monthly payments can be higher than lease payments. Meanwhile, a lease buy out loan is calculated based on the total purchase amount of the car. The car belongs to you after your final payment.
Buyback and payment loan
Best: A poorly credited borrower who cannot qualify elsewhere.
Also known as a second chance car loan, buyback, payer loan is a type of dealer funding for poor credit borrowers. This is the last resort option. These loans come with high empty fees and high monthly payments. Lots may even insist on installing a GPS tracker or starter shareholding as a condition of approval.
Instead, they shop for bad credit car loans for low-cost approval opportunities.
Car loan refinance
Best: A borrower with an existing car loan that can qualify for a lower fee.
Auto loan refinances are often used to get more affordable rates or extend the loan term to reduce monthly payments. You can also refinance, reduce the term of your loan, and pay off your loan faster.
This type of car loan can be a wise financial move for several reasons. If the market rate drops after taking away your current loan, it’s worth checking if a better rate is available. Also, if your credit score is higher than when it was first applied, or if you don’t get the best rate using dealer finance, you’ll be eligible for a better deal.
Cash-out Auto Dynance Loan
Cash-out refinance loans are similar to traditional refinances, but you can turn the fairness of your car, or the difference between what you owe and what you owe, into cash. You will replace your current loan with a new loan that includes the fairness you have taken.
The amount of cash you can withdraw is generally limited to the shares you have in your car. Still, if you need fast cash, this loan is beneficial.
Note that increasing the number of principals usually means paying more interest over the life of the loan. Also, not all lenders offer cash-out automatic refinance loans, so you’ll need to write some scripts to find a lender who can lend you aid. Finally, don’t forget that increasing the amount you owe will increase the risk of turning you upside down.
Important car loan terms
There are many different car loans to choose from, but knowing them is just the first step. Take your time to get used to how interests are calculated, direct financing and indirect financing, and the differences between pre-approval and pre-qualification.
Simple and pre-calculated interests
There are two types of interest in car loans: simple interest or pre-calculation.
Simple interest loans are much more common. They calculate the interest paid each month based on their current principal balance. As the principal balance decreases, the interest you owe on each payment will also decrease. So, paying the minimum monthly amount will allow you to save the bundle with interest and pay off your loan early.
You will usually find pre-calculated interest loans from lenders who work with bad credit buyers. A pre-calculated interest loan will initially calculate the loan balance, origination fee, and interest and be divided over the entire loan term according to a formula called the 78 rules.
If you pay the minimum monthly amount for the loan term, there is little difference between a simple interest loan and a pre-calculated interest loan.
However, if you plan to pay off your loan early or make a larger payment, the pre-calculated interest loan will not save you money as interest for the entire loan term is already taken into account in your monthly payment amount.
Direct and indirect fundraising
Direct funding is when you acquire car funds through a lender outside the dealer. Getting approval or pre-approval of your car loan with the lender before heading to the dealer will give you more negotiation power during negotiations.
You know how much you qualify for, along with the interest rates and the duration of the loan you qualify for. This information is useful so knowing exactly how big your budget is can remove any guesses from your car shopping process.
Once you are ready to seal the transaction, the dealer will verify the information and complete the transaction. Alternatively, you can use the offers you received to negotiate a better financing deal with the dealer.
With indirect funding, dealers provide their own funding through lending partners. Work with the dealer to fill out the car loan application form. Auto loan applications are sent by the dealer to the lender or lender.
Indirect funding is convenient, but dealers may mark up interest rates to ensure profits. And there’s no way to know if you’re getting the best deal, as the dealer handles the fundraising process from start to finish.
Pre-qualification and pre-qualification
Applications for prequalifying or preapproval of a car loan are generally a wise choice that will help you decide on monthly payments. They may appear similar on the surface, but for most buyers, pre-approval is more useful at dealers.
This is because pre-approval is excellent for those ready to buy. Getting pre-approval for a car loan means your lender has already evaluated your application and approved it to you for fundraising. Preapproval can provide solid ideas for loans and make it easier to negotiate with dealers.
Prequalification, on the other hand, is merely an estimate of what your loan is. This is not an actual offer, you will need to apply to get full approval and get a strict credit pull. Prequalification is useful in the early stages of purchasing a car, but once you are ready to drive the lot, you will need to shoot for pre-approval to ensure you are in the best position.
How to choose the right type of car loan for you
Use these steps to select the type of car loan.
- Check your credit score: The first step is to check your credit score to see which type of car loan is best.
- Compare car loan types: We will research and compare the types of loans that suit your situation. For example, if you have an existing car loan and want to lower your fees, look for a refinance loan.
- Shopping: Before choosing a loan, you can research and compare fees, conditions and fees from at least 3-5 lenders to get the best deal.
Conclusion
While auto loans share similarities, there are important differences to remember when deciding which one is best for you and your needs. The best options will depend on your loan goals, such as replacing your current loan, buying a new car at the dealer, or something else.
Before deciding which type of car loan is the best, understand how to prepare for the application process. You will also be approved in advance to compare car loan fees to find the best lender and ensure competitive funding.
